Omaha, Neb.-based PrairieSmarts is rolling out software that looks at risks faced by securities in both the past and future.
Portfolio Defense incorporates a “look-back” model tracking price movements of 35,000 securities and mutual funds back to January 2006 and a “look-forward” model that projects returns for 5,000 names that have options traded on them, using a study of every option traded since 2002. The system also gives extra weight to “black swan” events that can roil markets.
In a sample combination of stocks, options and funds, a $61,760 portfolio may be shown to face a loss of 65.77 percent, or $42,669.54, in the next day of trading. The metrics will also show how many “ruin days” the portfolio is likely to face over the long haul-days where all the equity in the portfolio could be lost.
The system alters these estimates whenever new prices or positions are available, on a look-back basis always and on a forward-looking basis, where applicable.
Over time, traders and portfolio managers can make better judgments of just how much of a given security they should hold, buy or sell.
“In practice, you want to take risks. Risk management is exactly that,” said PrairieSmarts managing partner Ron Piccinini. Risk “is controlled through position sizing.”
The professional version of the product is aimed at active traders, hedge funds and proprietary trading firms.
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